What is a Credit for equity and how does it work and in which situations is it particularly useful.
The important facts in brief
When do we speak of equity capital?
Equity is own assets that belong to the builder or homebuyer without any third-party access rights or claims. It is in unrestricted ownership. With these assets, a distinction is made between monetary assets and tangible assets. Tangible assets consist primarily of tangible items – for example, real estate, furnishings, long-term consumer goods. The financial assets include, besides cash, mainly capital and financial investments (bank deposits, securities, life insurances).
Financial assets are comparatively easy to liquidate and can therefore be used for financing purposes, whereby the type of investment is also important. With tangible assets, on the other hand, it is more difficult; here there is often a long-term capital commitment. That makes it if necessary. It is necessary to look for alternative financing – at least for a certain period of time – even though assets are available: a "loan for equity".
What is the importance of equity capital when financing a house??
Banks usually expect a certain equity share for construction loans. Although there are also so-called hundred percent financings. In addition one must exhibit however a first-class credit rating, besides such credits are more expensive than "normal" building loans. From the lender’s point of view, the contribution of own assets to the financing has a risk-reducing effect. For equity capital neither interest is to be paid, nor exists a repayment obligation. This facilitates the servicing of loans. Payment disruptions or defaults become less likely.
How much own capital funds for the construction financing?
An equity share of 20 percent is considered a rule of thumb for real estate financing – at least for owner-occupied residential property. In the case of rental properties, the calculation is sometimes somewhat different. How much equity one must show, depends also on the respective bank and on the individual creditworthiness. The equity share also plays a role in credit conditions. The lower the risk, the more favorable the financing becomes.
What does "credit for equity" mean??
"Loan for equity" can have the following meanings in connection with a real estate loan:
- A loan is to be taken out because one does not want to use existing equity capital for the financing.
- (Temporary) financing is needed because existing equity is not available as quickly or only with disadvantages.
- Financing is necessary because no equity capital is available and must only be built up over time.
All three meanings are discussed below.
The building savings contract: classic combination of loan and equity capital
The classic combination of equity and debt financing for real estate is the building savings contract. However, equity is built up first, followed by the loan – not vice versa. In the savings phase, regular savings installments are used to systematically accumulate a building savings balance. When the contract is ready for allocation, the credit balance can be paid out and an additional building society loan can be taken out. Both can then be used for financing. The conditions are fixed from the outset. This makes building savings contracts very safe to calculate. The other way around – first a loan, then equity – is to combine a bullet loan with a building savings contract. More about this in the next section.
Finite loans: first credit – then equity
As a rule, real estate financing is annuity loans. This means that the loan is repaid in regular, constant installments with an interest and redemption portion. The situation is different for so-called bullet loans – also known as amortizing loans. Here, only interest payments are incurred during the term of the loan. The repayment is made in one sum at the end of the term. Instead of the ongoing repayment, a repayment substitute is often agreed for such loans. During the term, (own) capital is systematically saved, which is used for repayment at the end.
In this sense, the amortizing loan can be seen as "pre-financing" for equity capital that is not (yet) available and is only formed during the term of the loan. There are different ways to accumulate capital. Common – since they are easy to calculate – are building society savings contracts or endowment life insurance policies. However, fund savings plans, fund-based life insurance or bank savings plans are also conceivable. In the case of owner-occupied real estate, bullet loans are usually not worthwhile, but the situation can be different for rental properties because the interest on the loan is tax-deductible.
Interim financing – bridging until equity is available
As a rule, interim financing is also a bullet loan. The difference between bridging loans and amortizing loans lies in the term: bridging loans rarely last longer than 24 months. On the other hand, the repayment substitute is waived here. Because the equity for which the loan is taken is already present but not yet available.
Typical constellations in which interim financing can be considered are:
- Another owned property is to be used to finance the real estate project, but must first be sold.
- There is a building society savings contract that is not yet ready for allocation.
- An existing life insurance policy has not yet reached the end of its term. Are fixed for specific periods of time and are not available prematurely (for example, time deposits, savings bonds).
- Existing capital investments could only be liquidated with considerable losses (due to price and stock market developments).
Intermediate financing is usually more expensive than "normal" mortgage loans because of the increased and additional processing work involved. A variable interest rate "in line with the development of market interest rates" is customary.
Borrow existing equity?
Theoretically, assets other than the real estate to be financed can also be used as collateral for longer-term loans if they are of value. You then receive "credit for equity. However, taking out a loan only makes economic sense if the return on equity is higher than the interest on the loan. This is rarely the case. Otherwise, it is more advantageous to use equity for financing.
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Are promotion loans "credit for own capital?"
For builders and home buyers, there are various subsidy programs that support financing. At the federal level, u.a. the Kreditanstalt fur Wiederaufbau (K) is responsible for the. The programs implemented by the K work mainly through subsidized loans. This is true for the programs:
- Energy-efficient construction
- K home ownership program
- Renewable energy standard
K also offers a grant-based additional funding for fuel cell heating systems and construction support, which, if applicable. can be combined with other programs. In the "Energy-efficient construction" loan program, a repayment subsidy is possible, which reduces the effective loan amount and acts like equity capital. The subsidized loans themselves do not constitute equity capital, but they do support equity capital formation through interest rate reductions and in conjunction with subsidies.
Baukindergeld – "real" equity capital
Families with children who have bought a property in the period between 1. January 2018 and 31. December 2020 buy or build a house, can claim Baukindergeld as a subsidy, provided that the annual taxable household income 90.000 euros plus. 15.000 euros per child. For each child, 1.200 euros p.a. Paid – that is, a total of 12.000 euros. Since these are grants that do not have to be repaid, the "Baukindergeld" is "real" equity capital. The application is made directly to K.
This article shows: there are durc-haus different ways to get "credit for equity. However, the best constellation is usually one in which sufficient equity is available when financing a property is pending. This allows additional financing costs to be avoided. Sound, long-term financial planning and a well-considered investment strategy can help to create a sufficient equity base "in the right amount" and "at the right time".